Opinion

Anatole Kaletsky

This weekend, China will plot its economic future

Anatole Kaletsky
Nov 6, 2013 20:13 UTC

The ponderously named Third Plenary Session of the 18th Central Committee of the Chinese Communist Party, which takes place this weekend, is a more important event for the world economy and for global geopolitics than the budget battles, central bank meetings and elections that attract infinitely more attention in the media and financial markets.

The obvious reason for this meeting’s importance is that China is destined in the long run to become the world’s biggest economy and a political superpower. And the Third Plenum, traditionally held roughly 12 months after the appointment of a new Party leadership, has been used twice before as an occasion for the new leaders to spell out the main strategies they hoped to implement as they consolidated their power. At the Third Plenum in 1978, Deng Xiaoping launched the market reforms that unleashed the power of the profit motive in China, and it was at the corresponding event in 1993 that Jiang Zemin accelerated the process of dismantling state-owned enterprises and integrating China into the world economy that culminated with China’s accession to the World Trade Organization in 2001.

A second, more immediate, reason for the world to pay attention to this weekend’s meeting is that China has recently become not just the strongest engine of growth in the world economy, but also the biggest source of potential economic surprises, both good and bad.

In 2009, China’s astonishingly ambitious economic stimulus program probably did more to prevent a depression than anything that happened in Washington, Frankfurt or Brussels — especially in Europe and Germany, which was the biggest beneficiary of the explosion in Chinese infrastructure investment. Last summer, by contrast, it was the panicky reaction of Chinese financial markets to Ben Bernanke’s hint of a “tapering” of the Fed’s monetary stimulus, that transformed what might have been an orderly correction of U.S. bond prices into the “taper tantrum” which slowed economic growth around the world. The lesson from this experience, and the subsequent downward revisions of global growth projections by the IMF and other forecasters this autumn, was that the biggest risks to the growth of the world economy now come from uncertainties about the strength of China and other emerging economies, not from the inevitable weakness of Europe, nor from the clear but disappointing recovery in the U.S.

What, then, might this weekend’s meeting imply for China’s future? Since China is far from a democracy or an open society and the Communist Party’s meetings are not open to the media or the public, the true answers may not emerge for months or even years. But expectations are running high. President Xi Jinping declared this week that the Third Plenum would offer a plan for “comprehensive reforms” that would transform China’s mode of development and readjust the economic structure through a “new style of industrialization, urbanization, technology and agricultural modernization.” One of Xi’s key allies, Politburo Standing Committee member Yu Zhengsheng, raised the stakes further by predicting “unprecedented” policy changes. And Li Keqiang, the prime minister, whose job is actually to put any new policies into practice, has already endorsed detailed blueprints presented by government think tanks, with considerable input from the World Bank and IMF, to transform the economy and double Chinese living standards by 2020.

Don’t expect the euro’s rally to last

Anatole Kaletsky
Oct 31, 2013 15:05 UTC

What is happening to the euro? Currencies are more important than stock market prices or bond yields for many businesses and investors, not to mention for globe-trotting families and humble tourists. Which makes it surprising that so little attention has recently been devoted to the strengthening of the euro, which hit its highest level since 2011 this Monday, having jumped by 5.5 percent since September and over 8 percent since early July. This remarkable ascent, which has also driven the euro to its highest level against the yen since the 2008-09 financial crisis, means that European exporters are losing competitiveness, Americans and Asians who live or travel in Europe are feeling like poor relations and many economists are starting to worry that Europe’s nascent economic recovery will be snuffed out.

Purely financial players, by contrast, seem to be more enthusiastic about the euro’s strength than they have been for years. Speculative futures bets in favor of further euro appreciation have reached their highest level since the summer of 2011 — and the only time they were higher than that in the past decade was in the period just before the Lehman shock. Significantly, both of these speculative crescendos were followed by sharp euro declines, since currency markets generally turn when bullish sentiment reaches extreme levels. But there is a deeper reason to expect the euro’s seemingly irresistible rise to reverse.

Currencies tend to move in trends for many years, and the fact is that the euro’s long-term trend against the dollar is still almost certainly downwards, despite the big gains of the past few months.

With hostage taking over, a Washington deal beckons

Anatole Kaletsky
Oct 24, 2013 15:37 UTC

Nobody should be surprised that Wall Street hit new records this week. After all, the U.S. has just witnessed the end of a sensational hostage crisis that was threatening national security and undermining economic confidence — and even more sensationally, this was the second such crisis in two months.

John Boehner was held hostage by Republican hardliners until last Thursday, when the U.S. Congress voted to continue pumping money into the U.S. government. The fiscal militants forced Boehner to endanger the U.S. economy with threats of a Treasury default. Boehner reluctantly paid this rhetorical ransom in order to preserve the appearance of party unity and therefore his own credibility as a political leader.

Now consider events a month earlier on the other side of Washington. Until September 18, when the Federal Reserve voted to continue pumping money into the U.S. bond market, Ben Bernanke was arguably held hostage by the Fed’s hardliners. The monetary militants forced Bernanke to endanger the U.S. economic recovery with threats of a premature end to quantitative easing. Bernanke reluctantly paid this rhetorical ransom in order to preserve the appearance of institutional unity and therefore his own credibility as an economic leader.

The positive side of the budget debacle

Anatole Kaletsky
Oct 17, 2013 15:07 UTC

The U.S. budget battle was always likely to end in a Republican defeat and a rout for Tea Party firebrands; but the outcome has turned out to be even more dramatic: an unconditional surrender, instead of the negotiated ceasefire suggested here two weeks ago. Trying to spot historic turning points in real time is always risky, but the scale of this debacle suggests that U.S. politics and economic policy really will be transformed in at least four important ways.

Firstly, the shift in the balance of power between Obama and the Republicans since last November, described here, has been spectacularly confirmed. It is too early to guess whether the GOP’s slumping popularity will give the Democrats a chance to regain control of the House of Representatives next November. The Democrats would be very likely to achieve this if they could hold on to their present lead of 5.5 percentage points in the Real Clear Politics average of Congressional vote polling, since this would represent a swing in favor of the Democrats of 4 percent, which should suffice to win the extra 17 seats they would need to win control.

Conventional wisdom in Washington contends that a Democratic win next year is almost impossible because of a historic tendency of presidential parties to lose votes in midterm elections, but this history has little statistical significance, and is counterbalanced by the voting figures from the three occasions since 1945 when parties that lost the popular vote kept control of the House. In all these cases the majority party in the House only lost the popular vote by tiny margins — in 1952, by 0.5 percent, in 1996 by 0.7 percent and in 2012 by 1.2 percent. So an election in which the Republicans lost the popular vote by 5.5 percent, as indicated by recent polling, but kept control would create a totally unprecedented situation. In any case, speculation about next year’s election is pointless since the polls are likely to shift abruptly — one way or the other and for reasons we cannot even imagine today. What is clear, however, is that the Republicans face deep unpopularity in the short-term and this will transform the outlook for economic policy in the next few months.

Learning budget lessons from Japan and Britain

Anatole Kaletsky
Oct 10, 2013 14:55 UTC

While the world is transfixed by the U.S. budget paralysis, fiscal policies have been moving in several other countries, most notably in Japan and Britain, with lessons for Washington and for other governments all over the world.

Let’s start with the bad news: Shinzo Abe’s decision to increase consumption taxes from 5 to 8 percent next April. This massive tax hike, to be followed by another increase in 2015, threatens to strangle Japan’s consumer-led growth from next year onwards, since Abe looks unlikely to offset this massive fiscal tightening with stimulative measures that would maintain consumers’ spending power. Even if Abe delivers on his vague promise to compensate with business tax reductions, these will only aggravate the over-investment and corporate cash hoarding that have long distorted the Japanese economy. Meanwhile, the government’s willingness to risk economic recovery in the cause of fiscal discipline implies that those of us who believed Abe was making an unconditional commitment to do whatever it takes to achieve economic recovery were simply wrong. Now that the forces of budgetary austerity have reasserted themselves, Japan’s probability of ending its decades of stagnation is much reduced.

Now for the good news: a change of attitude to debt and borrowing is transforming Britain from the second-weakest G7 economy (after Italy) into a world champion of growth. As recently as last April, the British government was attacked by the International Monetary Fund’s chief economist for “playing with fire” by trying too hard to reduce its budget deficits. This week the IMF World Economic Outlook praised Britain’s rapidly improving economy and upgraded 2013 growth projections by 0.5 percentage points, to 1.4 percent. That may not sound like much, but this improvement comes when almost every economy is being downgraded — and compared with last year’s miserable 0.2 percent growth rate, it feels almost like a boom.

Game theory and America’s budget battle

Anatole Kaletsky
Oct 3, 2013 14:17 UTC

So far, the battle of the budget in Washington is playing out roughly as expected. While a government shutdown has theoretically been ordered, nothing much has really happened, all the functions of government deemed essential have continued and financial markets have simply yawned. The only real difference between the tragicomedy now unfolding on Capitol Hill and the scenario outlined here last week has been in timing. I had suggested that the House Republicans would give way almost immediately on the budget, if only to keep some of their powder dry for a second, though equally hopeless, battle over the Treasury debt limit. Instead, it now looks like President Obama may succeed in rolling the two issues into one and forcing the Republicans to capitulate on both simultaneously.

The ultimate outcome of these battles is now clearer than ever. As explained here last week, the Tea Party’s campaign either to defund Obamacare or to sabotage the U.S. economy was doomed by the transformation in political dynamics that resulted from November’s election — above all by the fact that the president never again has to face the voters, while nearly every member of Congress must. This shift in the balance of power made the Republicans’ decision to mount a last stand on Obamacare, instead of attacking the White House on genuine budgetary issues, politically suicidal as well as quixotic. But while the outcome now looks inevitable, the timing of the decisive battle is important. Financial markets and businesses have responded with a tolerance bordering on complacency to the shenanigans in Washington, but this attitude could change abruptly if the House Republicans’ capitulation is delayed too long. As they say in the theater, the only difference between comedy and tragedy is timing.

The risk, as everyone now realizes, is that the battle of the budget — which turns out really to be just a minor tussle over the funding of a limited range of worthy but nonessential government services — remains in a stalemate right up to October 17, when U.S. Treasury is expected to hit its debt limit. At that point, an immediate settlement will be needed or all hell could break loose. The key question for businesses and investors around the world, therefore, is whether the Republicans’ impossible demands to defund Obamacare are removed from the budgetary bills comfortably before the October 17 deadline, or whether this capitulation is triggered by a financial crisis once the deadline draws too close.

Why markets don’t fear a government shutdown

Anatole Kaletsky
Sep 26, 2013 14:44 UTC

Now that the worldwide panic over U.S. monetary policy has subsided, Washington is brewing another storm in a teacup: the budget and Obamacare battle that reaches a climax next Monday, followed by the debt limit vote required to prevent a mid-October Treasury default. The ultimate outcome of these crises is a foregone conclusion. As Senator John McCain told the press this week: “We will end up not shutting down the government and not de-funding Obamacare.” He could surely have added that a Treasury default is also out of the question.

But how exactly will Washington manage to dodge these bullets? As McCain added, “I don’t know what all the scenes are, [although] I’ve seen how this movie ends.” Markets understandably fear that all the plot twists leading up to a seemingly satisfactory resolution could produce an economic horror film, crushing business and consumer confidence, damaging economic growth and triggering a major sell-off in global stock markets. That, after all, is exactly what happened when the U.S. Treasury almost defaulted in July 2011.

What, then, are the chances of similar disruption in the weeks ahead? The risks this time are much smaller than in 2011 because of four events that have transformed the dynamics of U.S. budget battles.

The markets and Bernanke’s “taper tantrums”

Anatole Kaletsky
Sep 19, 2013 16:22 UTC

So it was, after all, a storm in a teacup. Financial markets around the world have been going through a series of “taper tantrums” since May 21, when Ben Bernanke first mentioned the idea of gradually reducing or “tapering” the Federal Reserve Board’s monetary expansion. Throughout these four months, I have argued in this column that financial markets had grossly exaggerated or completely misunderstood the significance of Bernanke’s comments. This has turned out to be the case, as evidenced by the huge moves in share prices, currencies and bonds on Wednesday after the Fed announced that it would do exactly what Bernanke had suggested all along — namely, nothing.

The Fed’s decision not to cut back on its $85 billion of monthly bond purchases, even by some small symbolic amount such as $5 billion, stunned the markets — but only because analysts had refused to believe what Bernanke, along with most other central bankers around the world, was saying throughout the period since May 21. The Fed chairman repeatedly stated that tapering would begin only if and when there was consistent evidence that U.S. employment conditions were improving. Bernanke also stated that, even after tapering started, the Fed would not allow U.S. monetary conditions to tighten and would keep short-term interest rates near zero for a very long period — at least until 2015, and quite possibly beyond.

Why, then, were investors so surprised when the Fed officially implemented exactly what Bernanke had promised? And now that the Fed has put its money where Bernanke’s mouth was, how will the global economy and financial markets react?

Dalian Man

Anatole Kaletsky
Sep 11, 2013 21:02 UTC

The Davos economic forum, held every winter in the Swiss Alps, allows its participants to look down at the world from above: topographically because of the high-altitude location, but also symbolically, because of the high incomes, high status or high-minded rhetoric that characterize the jet-setting global elite dubbed “Davos Man” by the American political scientist, Samuel Huntington. This week, however, I discovered a sub-species of Davos Man with a very different perspective. At the “summer Davos” that the World Economic Forum now organizes every year in China, participants look at the world sideways, from the East instead of down. The shift in viewpoint is striking, even for people who travel frequently to Asia, as I do, but rarely experience such total immersion in the eastern elite’s hopes and fears.

The biggest surprise at this week’s Dalian forum was the East-West divergence of opinion on the economic outlook, both in the months ahead and in the very long term. Western economists mostly believe that developing countries in general, and China in particular, are threatened by serious financial crises as U.S. monetary policy begins to be tightened, probably as soon as the Federal Reserve Board’s meeting next week. The consensus view is that emerging economies have invested and borrowed too much, taking advantage of the Fed’s easy money and will now face painful deleveraging similar to what Europe and the U.S. experienced five years ago. This deleveraging means, in turn, that the glory days for developing economies are probably over — and most of these countries, perhaps including China, may never escape the “middle-income trap” that has prevented further progress in many developing economies. The trap starts to hobble growth when per capita incomes rise to around $10,000 and many of the obvious opportunities for catching up with Western productivity are exhausted. China’s is $9,160 according to the IMF.

When I travelled to China this week, I expected obsessive discussion of the recent shift of economic sentiment against developing countries and the resulting collapse of bonds, shares and currencies in most emerging markets this year. And indeed warnings of ruinously compounding debt burdens and dangerously unsustainable investment bubbles did dominate Western presentations, both in Dalian and at an earlier academic seminar in Shenzhen, organised by Tsinghua University and the Institute for New Economic Thinking.

Syrian intervention invokes Europe’s history

Anatole Kaletsky
Sep 5, 2013 14:51 UTC

The prospect of Congressional approval for a U.S. attack on Syria is probably good news for the world economy and financial markets, since the impact on the oil price of an intense but strictly time-limited military action is likely to be a classic case of “buy on the rumor and sell on the news.” History suggests that the moment U.S. bombs start raining down on Syria, oil prices will pull back and stock markets around the world will rise. But what about the bigger picture? How will a U.S. bombing campaign affect the stability of the Middle East and global geopolitics?

To consider these questions it helps to recall that the main principle underlying the United Nations Charter is non-intervention by foreign governments in the affairs of sovereign states. Morally, this principle is hard to justify. It conflicts with the “duty to protect” civilians from barbarous treatment by their own rulers, which Western governments have invoked when crossing international borders in response to massacres in former Yugoslavia, Sudan and Sierra Leone — and should have invoked, with hindsight, to stop Hitler in the 1930s and prevent the Rwandan genocide in 1994.

Why, then, is non-intervention still recognized as the bedrock of modern international law? A standard answer is the Peace of Westphalia — a series of treaties in 17th century Europe that legally enshrined national self-determination and inviolability of borders for the first time. But why should the world today still be bound by these 400-year-old ideas?

  •